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What’s Up With Delaware?

Over the past few years I have worked with a lot of people who want to start LLCs, not-for-profits and incorporations.  Even before we meet, I can guarantee that one of the first things I hear will be: “My friend/relative/acquaintance told me I should file in Delaware because it will be cheaper because of taxes.”

I don’t know who this person is that is spreading these rumors, but I wish he or she would stop.

The truth is that for most businesses filing in Delaware does not save any money. Instead, you should form your business (and file the appropriate papers) in the state where you will actually be running  your business.  Before you buy in to the Delaware hype, consider where your offices will be, where you will be opening your shop or where the majority of your clients will be based.

 Why? 

Your home state (you know, the one where you will actually be operating your business from) will want to see documentation that you are registered to do business THERE .  If you are doing business in New York (for example), meaning opening a bank account, interacting with customers, signing a lease or seeking a license, the State of New York wants you to be registered there (and other states feel similarly).

Only now that you have formed your business in Delaware (and paid Delaware all the filing fees) you now have to register as a “foreign corporation” in order to operate in your home state.  To register as a foreign corporation you will often have to pay the EXACT same amount of money as if you had just formed the company in your home state.  So essentially your business ends up paying the State of Delaware AND your home state.

So how can start-ups save money?

Believe it or not, the most cost-effective choice for most small start-ups is to register their company where they will be doing business.

The idea that you can save money by registering in Delaware is a MYTH! In short, get all the facts before you jump on the Delaware bandwagon.

I hope you find this useful and that it saves you money. I know a lot of people who wish they would have known about this before registering (and paying in Delaware AND then again in their home state).

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How Do You Decide What Legal Structure Your Business Should Be?

Once someone decides to start her own business, one of the first dilemmas she will be faced with is: what kind of legal structure should I form?

The law offers various types of businesses, from sole proprietorships to LLCs to S Corporations to Not-for-profit corporations.  People starting a business may know what they want to do or sell, but they have trouble determining which legal structure is right for them.

When clients ask me this question I always start by telling them”it depends.”  I then pepper my client with a handful of questions to see how she feels about the following key factors:

– Control.  How much control do you want to have over the business you are starting?  If you want exclusive control then your business is going to take a different form from someone who is looking to share decision-making power.

–Liability.  Some legal structures do not protect your personal assets.  If you are concerned that the money you own personally (as opposed to the business funds) remains separate, you need to choose a legal form that provides for this.

–Raising capital. More basic entities (like sole proprietorships) are restricted in how they can raise capital.  If you are planning to raise funds through means like selling shares, you should consider a legal structure that allows you to do this.

–Taxes.  Each legal form is taxed differently.  You should get advice from an accountant and make sure that the form you choose will be the right financial fit for you.

If you are thinking of starting a business these are some great topics to consider before choosing a legal structure.  Do any business owners have other tips or factors they considered when deciding the legal structure their business would take?

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Top 3 Things To Think About Before You Quit That Crappy Job

I don’t know if it is the change of seasons or the time in my life, but I have been getting a lot of inquiries from people who are unsatisfied with their current job.

I am never one to argue that you should stay somewhere you are unhappy, BUT before you walk away from a regular paycheck you should take some time to assess where you currently stand.

You can start by asking these 3 questions:

1)   Do you have an employment contract? – If so, this may explain the terms of how you may permissibly leave and what you might be entitled to if your boss decides to let you go.  If you don’t have a contract, what you are entitled to is more fluid, but you can still leave with something if you negotiate properly.

2)   Does your employer want you out? – If the unhappiness works both ways, it is usually in the employee’s best interest to get laid off (as opposed to quitting).  Getting laid off can often entitle a person to unemployment benefits or severance.  There are often ways to negotiate an exit if both parties are unhappy.

3)   Can you navigate leaving on good (or at least neutral) terms?  A bad employment reference can be a problem in this economy and if you can stay on neutral terms with your employer you will be in a better position to be hired for your next, even better job.

Answering these questions is a great way to start thinking about how to exit an unsatisfying work environment and start to protect your own interests.  Once you determine where you stand you will be in a better place to assess your options, negotiate carefully and exit gracefully.

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Working from Home in New York City

Did anyone catch the article in the Real Estate Section of the New York Times this past Sunday about the plethora of New Yorkers who are running micro and small businesses out of their homes?  If not, definitely check it out.  Here is a link: http://www.nytimes.com/2012/08/26/realestate/running-a-home-business-in-new-york.html?emc=eta1

The article describes people around the city who are running all kinds of businesses out of their homes, from personal trainers to bakers to retailers of children’s clothes.  As the article suggests, not all of these businesses are done above board and on the books.  But there are a surprising number of ways to compromise with your neighbors. Working out of your home is a great way to save money as you start the business and can be convenient too. If you are already running a business out of your home, or thinking about starting one, I would love to hear about how it is going and what challenges and successes you are encountering.  Do you find a way to hide it from the neighbors or get them involved?  Either way it is important to recognize and acknowledge the challenges early on rather than wait for them to grow into something more serious. I really enjoyed the article and was heartened and inspired by the the incredible entrepreneurial spirit that so many New Yorkers have.

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Why you should learn about Fiscal Sponsorship Before Starting a Not-for-Profit

People who are inspired to start a not-for-profit are usually hoping to change the world, or at least an aspect of it, for the better. You see a problem and you think you have a solution for that problem. The next step most people think of, after doing some research and testing to determine if your solution helps to alleviate the problem, is to start an organization so you can formally begin to address the problem. In many cases, a not-for-profit is the organization type that makes the most sense.

While you can be recognized in New York State as a not-for-profit by filing some basic incorporation papers, this recognition does not allow you to accept tax deductible donations. To receive tax deductible donations the organization must obtain 501(c)3 status from the federal government. This process can often be lengthy and more difficult.

If your organization is hoping to move more quickly, you should consider finding a fiscal sponsor. A fiscal sponsor is usually an organization that already has 501(c)3 status. Once your organization hooks up with a fiscal sponsor, the new organization can borrow the sponsor’s tax exempt status. The fiscal sponsor typically charges for this arrangement (often taking between 6% and 10% off the top of any donation). For the arrangement to be legitimate, the sponsor must obtain complete control over the funds that come in to the new not-for-profit and the fiscal sponsor’s mission must be similar to the new organization’s mission. In addition to helping with funds, a fiscal sponsor can provide much needed resources, knowledge, and experience to a new not-for-profit. Starting a not-for-profit presents many unique challenges and knowing people who have succeeded before can only help your organization grow.